Do letters to shareholders have information content?

Prapaporn Kiattikulwattana

17 citations0/0 files storedAsian Review of Accounting

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

Purpose The purpose of this paper is to investigate the information content in letters to shareholders in terms of business content, tone and types of business vocabulary. Design/methodology/approach The study uses multiple regression models to test the information content concerning business content, tone, and types of business vocabulary in letters to shareholders. Two textual analyses in accounting research dictionaries are used. Loughran and McDonald’s (2011) dictionary is used as a scheme to identify the positive and negative words, and Kothariet al.’s (2009) dictionary is used to identify the business vocabulary. Findings Letters to shareholders contain incremental information for investors. First, the results show that the market reacts negatively to the content of these letters. The more that business content is disclosed, the lower the abnormal returns. It can be seen that investors catch additional information from letters to shareholders. Second, investors in negative unexpected earnings firms tend to not trust the concentration of positive tone in the letters. Third, some types of business vocabulary in the letters have an influence on investors’ decisions. In addition, larger amounts of business content are seen to be negatively related to firms’ future performance. Practical implications Due to the effect of the content of letters to shareholders, the Securities Exchange Commission may wish to consider the results of this study before setting new disclosure regulations. Specifically, some inside information might have a negative effect on market returns. Originality/value The study indicates that letters to shareholders are a disclosure venue between companies and investors, where investors react to certain business vocabulary. Some business words are associated with lower future performance. Therefore, the market reacts negatively when these words are reported in the letters.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1968An Empirical Evaluation of Accounting Income Numbers 2005The economic implications of corporate financial reporting 2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 2007Giving Content to Investor Sentiment: The Role of Media in the Stock Market 1975Organizational Legitimacy: Social Values and Organizational Behavior 2008Annual report readability, current earnings, and earnings persistence

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